Avoid these mistakes when considering a IRA Planning for Inheritance

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What do you do, when you inherit an IRA plan that really isn’t yours? Too many individuals make the mistake of assuming they can basically handle their inherited IRA plan, any way they choose. Surprisingly enough, that is not the case.

Seek Expert Advice Before Making Withdrawals

According to an authorative expert attorney on IRA planning, the worst mistake individuals make is cashing out their plans, before seeking legal advice. The Internal Revenue says, they offer “open options”, but what they really mean is “open traps.” One wrong move can cost IRA owners hundreds or even thousands of dollars in penalties.

One fact is certain; the money has to be taken out at some point, but the question is when. There are two workable options for non related beneficiaries.

  • Take distribution payments over their life expectancy (Stretch options)
  • Liquidate the account within 60 months or 5 years

Although, the IRS offers a way out, interest and taxes both accumulate over time. Only a Roth IRA can earn tax free interest, compared to an inherited IRA. Why, because taxes are generally paid, before the money goes into an IRA account. In cases of an inherited IRA Roth account, penalties for early withdrawals under the five year threshold, has dire expensive consequences.

Inherited spousal accounts can be treated as personal accounts. Spouses can let their IRA inherited account set, untouched until they reach the age of 70 ½. If funds are withdrawn before the age of 59 ½ there is a 10% penalty fee.

In cases of non spousal IRA beneficiaries, the Stretch option allows them to request minimum monthly withdrawals over their life time. What’s the catch? The first distribution request must be made, the following year after the decedent demise, before the 31st of December. Missing distribution deadline request can cost inheritors 50% of their IRA inheritance.

Inheritors receiving an IRA should be aware of tax deductions and taxable earn income. IRA distributions are taxable income, and will be charged as such. Completing the right forms is essential, and can prevent a lot of problems in the future. The form can be misleading, and difficult to understand.

Most forms are not updated regularly, which causes individuals to unknowingly enter a wrong or erroneous reply. Hiring a trust to oversee the account can be beneficial or extremely detrimental, depending on the knowledge of the trustee.  It makes the success like complicated and to avoid common costly mistakes, the trust should be drafted by an experienced and knowledge trust attorney.

Bad advice comes with a large price tag, and often the beneficiary is the one footing the bill. Seeking advice before making any harsh decisions can prevent future entanglements that may prove to be nearly impossible to get out of.